Itau Unibanco Holding SA

BOVESPA:ITUB4

Earnings Call Transcript 2022-Q4

[Renato Lulia]

Hello. Good morning, everyone. I'm Renato Lulia, Group Head of Investor Relations and Market Intelligence at Itaú Unibanco. Thank you for participating in our video conference to talk about our earnings for the fourth quarter of 2022, which we're broadcasting directly from our office here in Avenida Faria Lima in São Paulo.

This event will be divided into two parts. In the first part, Mr. Milton Maluhy Filho will explain our performance and earnings for the fourth quarter of 2022. Next, we'll have a Q&A session where analysts and investors will be able to interact with us directly.

Now I'd like to give some instructions to make the most of this meeting today. For those of you who are accessing this via our website, there are three options for audio on the screen – all content in Portuguese, all content in English, or the original audio. In the first two options, we have simultaneous translation. To choose your option, all you have to do is click on the flag on the top left of your screen. Questions can also be forwarded via WhatsApp. To do so, just click on the button on the screen on the website or simply send a message to the number 55-11-94552-0694.

The presentation we'll make today is available for download on the hot side screen and also, as usual, on our Investor Relations website.

I now give the floor to Mr. Maluhy, who will begin the presentation on the earnings. And then I'll come back with you to moderate the Q&A session. Milton, go ahead.

[Milton Maluhy Filho, Chief Executive Officer]

Well, thank you, Renato. Welcome to our fourth quarter of 2022 earnings presentation. I'll also talk about the 2023 guidance. I'll go straight to the figures, so that I can bring you some more information.

Firstly, our earnings in the quarter totaled BRL 7.7 billion, a drop of 5.1% from the previous quarter, and BRL 7 billion in Brazil, which also dropped 5.7% from the previous quarter.

A very important topic I'd like to raise at the very beginning, so that it can be very clear to you, is the subsequent event – the credit case that was announced after December. In our balance sheet for 2022, there was an increase in provision for loan losses to cover 100% of this exposure. Therefore, there won't be any negative impact in 2023, only positive impact from a possible credit recovery.

I wanted to make this clear at the very beginning. I'll comment during the presentation on some adjustments to make it clear how our performance would have been without this credit event. But it's very important to highlight that the exposure in our balance sheet is 100% covered. If it weren't for this effect, our consolidated earnings would have been BRL 8.4 billion and BRL 7.7 billion in Brazil.

Speaking of profitability, already considering the provision for loan losses to cover 100% of the credit exposure caused by the subsequent event, we posted a consolidated return on equity of 19.3%, a drop of 1.7 percentage points and of 19.7% in Brazil. If it weren't for the subsequent event, our consolidated ROE for the fourth quarter would have been 21% and 21.7% in Brazil. Another very robust quarter and very significant from the performance standpoint.

To continue on the subject of the subsequent event, I'll jump to the cost of credit. At the end of the quarter, our cost of credit was BRL 9.8 billion. And if it weren't for the subsequent event, it would have been BRL 8.5 billion. Therefore, you may note a difference of BRL 1.3 billion, which was recorded in our P&L. And the difference for the total exposure was recorded in our balance sheet. For the subsequent event, it was recorded as additional provision for loan losses.

We always carry out regular reviews of the bank's additional provision for loan losses and we used a portion of this balance to complement the provision for the subsequent event. Therefore, the provision for loan losses covers 100% of the exposure. Part of it has already been recorded in the P&L in the amount of BRL 1.3 billion and part of it is recorded in the additional provision for loan losses. And if there is a deterioration of this case, naturally, it would consume the additional provision for loan losses that is associated with the event.

In the financial market with clients, there was a growth of 3.6% in the consolidated figure, reaching BRL 24.2 billion and, in Brazil, it totaled BRL 21.2 billion, which represents an increase quarter-over-quarter of 2.6%.

Speaking of the NPL for over 90 days, once again, we are very consistent with what we've been telling you for many quarters now. We can see a slight increase of 0.1 percentage points in the consolidated figure and 0.2 percentage points in Brazil. We posted another positive result for the efficiency ratio, reaching 41.2% in the consolidated figure and 39.1% in Brazil, a drop in both ratios from the previous quarter.

Now I'll talk a little about the credit portfolio. We've been reducing the pace of growth of the portfolio throughout the second semester of 2022. And you'll see that in the numbers. Our credit portfolio for individuals grew 3.7% in the quarter and 20% in the year. The SME portfolio grew 2.4% in the quarter and 10% in the year. We reached BRL 918 billion in the portfolio in Brazil and BRL 1.1 trillion in the consolidated portfolio, an annual growth of 11% and a 14% if adjusted by the foreign exchange variation.

In the next slides, I'll present the results compared to the 2022 guidance disclosed. For the loan portfolio, the growth expectation was between 15.5% and 17.5%, but the result was below the low range of the guidance.

We've already been telling you that the bank has been very carefully making adjustments to the risk appetite in view of the current macro scenario. I'm very comfortable with having delivered a figure that is below the guidance because of this.

Now deep diving into the portfolios. The collateralized product share in the individual portfolio grew from 47.7% in 2019 to 52.8% in 2022, so that we have a more guaranteed mix. Finance credit card portfolio and overdrafts, two lines that have a significant impact on the margin, dropped in the quarter as the result of an active risk management. On the other hand, this naturally had an impact on the margin of the product mix.

The margin with clients posted growth of 3.6% in the quarter, up BRL 800 million, of which BRL 600 million was the core increase and BRL 200 million was related to the working capital impact allocated to the margin with clients.

As I previously mentioned, the product mix had a slight negative impact of BRL 100 million. On the other hand, the average volume, the spreads and the effects of the operations in Latin America had positive impacts, raising our margin to BRL 21.5 billion.

We reached a consolidated annualized average margin of 8.7% and a risk adjusted annualized average margin of 5.6%, excluding the subsequent event. If we include the subsequent event, it was 5.1%. In Brazil, we were able to maintain the annualized average margin at 9.4% and a risk adjusted annualized average margin at 5.9%, excluding the subsequent event. But if we take the event into account, it reached 5.3%. We expected consolidated financial margin with clients to grow between 25% and 27%. And we delivered it very close to the top range of the guidance, which is good news.

Now we'll talk about the financial margin with the market. We should remember that 2022 was a very challenging year for this line, mainly due to the interest rate rises, volatility and the fact that we no longer have the positive effects of the overhead strategy that we had until 2021. But nevertheless, we managed to deliver a positive margin again as margin with the market reached BRL 700 million, slightly outperforming the last two quarters, already considering the capital hedge cost of roughly BRL 500 million per quarter. So we recorded another robust quarter as we performed well in both Latin America and Brazil.

We expected a major reduction in margin with the markets as our 2022 guidance for this line was between BRL 1 billion and BRL 3 billion. The good news was that we reached the top of the guidance, although we can clearly see a negative impact compared to 2021 results for all the reasons I've mentioned, notably due to the overhead strategy and to the impact of the capital hedge implemented in 2022, which added approximately BRL 2 billion in costs this year. Capital hedge was the major responsible for the drop of the margin with the market in 2022.

Moving to commissions and fees and results for insurance operations. We performed well in credit cards, both in issuing and acquiring activities, and recorded a 4.2% increase. We also performed well in asset management, and we recognized our funds performance fee in the second and fourth quarters. That is accounted for on a cash basis as required by the central bank. We recorded the performance fee in the fourth quarter, and this is why we posted increased earnings quarter-on-quarter. We also posted dramatic increases in insurance operations, both in quarter-on-quarter and year-on-year comparisons. We expected growth between 7% and 9% in 2022 commissions and insurance results guidance and we ended up with 7.8%, which means we were very close to the guidance midpoint.

Regarding asset management, our funding balance, whether through our own or third party products through the open platform, was up 8.7% year-on-year. The most important thing is that we can provide better products for our clients because of our complete portfolio.

Please bear in mind, focus on client centricity. We have performed really well in our own products due to a greater demand for fixed income products, which are deemed safer and less volatile. For this reason, the open platform output ended up falling in the period.

Acquiring transaction volume recorded a significant increase of 17.9% from 2021, with revenues growing more than two times then the volume of transactions, which means we've been performing really well due to the right mix of products and services, delivering real value and growth, with NPS of acquiring activities improving dramatically.

I've been emphasizing the growth of the insurance business in the previous quarters and the premiums earned were up 19.9% year-on-year. Really noteworthy is that the core of the insurance operations result has grown nearly 50%. We believe this segment is due to keep on growing.

Now let's move to credit quality. First, we noted that delinquency was at an acceptable rate as measured by the ratio of 15 to 90 days overdue NPL. This is a very important piece of information.

Last quarter, I mentioned that this rise in the Latin America ratio has been due to a specific corporate case that will be regularized and will not be transferred to NPL 90 days. As you can see, this was rightly done. In Brazil, and in total, we recorded a slight increase of 20 and 10 basis points respectively, as I commented back at the first slide.

Focusing on transparency, we recorded the impact of BRL 100 million from the sale of the active portfolio of 0.02 percentage points at the NPL rate. That represents a very small amount, but underlines the way how we value the transparency of any sales of our portfolio to the market.

In Brazil, delinquency, as measured by ratio of 15 to 90 days overdue NPL, is extremely acceptable for individuals and was flat compared to the previous quarter. The NPL ratio for SMEs recorded a slight rise. The ratio for the corporate segment is not a good indicator, since it usually concerns events rather than delayed payments.

You must remember that, last quarter, I mentioned that I expected NPL to go up in the fourth quarter for the individuals portfolio as we had noted in the third quarter, in line with the normalization process for this indicator, We recorded 30 basis points increase in the third and 20 basis points increase in the fourth quarter.

I had also told you that this normalization process would go until the first quarter of 2023. This expectation is reaffirmed which underlines our strength, risk management and ability to manage the cost of credit in more troubled times. Challenges surely lie ahead, but I believe the bank has been successful so far in walking through such tough scenarios.

NPL for SMEs in Brazil recorded a slight increase of 10 basis points and it poses no specific concern for us. The cost of credit to portfolio ratio closed the quarter at 3.5%. If it were adjusted by the subsequent event concerning this specific credit, it would be 3%, very close to previous periods and even below pre-pandemic results.

Cost of credit increased to BRL 8.5 billion in the fourth quarter from BRL 8 billion in the third quarter. And considering the subsequent event, it reached BRL 9.8 billion.

Loan coverage ratio in the wholesale segment reached 1,857%, precisely due to the provision for loan losses done in the fourth quarter to cover 100% of the exposure on the specific corporate case that entered into judicial reorganization. Thus, if the event occurs to the extent of the recognized provision, the coverage ratio will surely suffer. Cost of credit would have closed the year at BRL 31 billion if we excluded that subsequent event. That is at the top of the 2022 guidance.

To wrap it up, the amount we exceeded the 2022 guidance of BRL 1.3 billion is related to the specific case of this retailer. That is the subsequent event occurred in January 2023.

Moving now to OpEx. The non-interest expenses were up 6.7% year-on-year and 4.5% in the quarter, the latter due to its seasonality. We came close to the top of the guidance Brazil and within the consolidated guidance. The efficiency ratio reached 39.1% in Brazil and 41.2% in the consolidated figures.

Year-on-year, the investments we made in platforms and new business to improve the client experience were the main driver of non-interest expenses increase. Our core cost was up 0.7% or BRL 300 million.

The inflation in the period was almost certainly above 6% for banks, impacted by the effects of the collective bargaining from previous years at much higher levels. We've been able to make huge investments to build the future of the bank, while growing slightly above IPCA inflation index, but below inflation for banks.

Good news for the capital ratio, we made headway in the capital base for one more quarter by reaching 11.9%. If we disregarded the subsequent event, our capital ratio would be at 12%. Our Tier 1 closed at 13.5%. That is 50 basis points above our risk appetite. As a reminder, our risk appetite is 11.5% at CET1 and 1.5% at AT1. So, here we are again accumulating capital in the quarter. We've been successful in increasing earnings, generating enough capital to invest and grow our business and portfolios and also evolving the bank's capital base. So this is good news and one more positive quarter.

I've been talking about earnings all the time, but the pillars underlying our earnings, the ones I want to highlight here are, one, how our culture is engaging our employees whom we call Itaúbers and, two, how digital transformation is happening and the impact on what is most important for us, the reason for our existence, our client centricity agenda.

I'll start talking about culture. First, we reached an employer Net Promoter Score of 88 points. And this is the bank's record high eNPS. And I always say that engaged and happy employees deliver a higher client satisfaction. We reached almost 19,000 people who are already working in a community or tribe model. There are 2,030 squads in the bank's operations.

I'd like to share with you very carefully and humbly some awards and recognition we got in 2022. People ask me how we measure cultural transformation and employees engagement. And I think that these recognitions are the answer.

We are the first bank to top the Great Place to Work ranking with over 10,000 employees. So this is the first time a bank achieves this position of the best company in Brazil according to the Great Place to Work ranking. We were ranked first in the banks category of the Valor award. This was the first time Valor Magazine introduced the bank's category. We were ranked first in the Valor award career, the best in management. We also ranked first in the top companies of LinkedIn for the third consecutive year. We were elected the most innovative bank in Brazil by Valor Innovation. We were ranked first in the international category of the best workplaces for innovators award and eighth in the global ranking.

So I always look at these recognitions and feel delighted. I think we've been making important progress, but also in a humble way because things are still difficult and we need to keep on performing on a very sustainable basis.

Focusing on the coming quarters, the second pillar that is very important to our journey is digital transformation. The system modernization and focus on quick problem solving brings higher value creation to our clients and competitiveness in our business. I told you that 2022 was a key milestone for the bank's digital transformation. We managed to reach our goal of 50% of our platforms modernized with state-of-the-art technology and totally decomponentized.

As regards the competitiveness of our platforms, we reached the modernization of 70% of what we understand is relevant to the client journey. So rather than looking at the absolute figure of 50%, I prefer to look at this evolution because it's what impacts the UX user experience. Speed is increased and our ability to bring in an agile methodology, renewed digital platforms, a new culture and client centricity to production has allowed us to quickly increase our ability to deliver products, correct mistakes and deliver new features to production. We increased the speed by 756%.

Also very important is reducing incidents because incidents become issues for our clients. So when we look back at the period beginning back in 2018, the numbers of incidents in our platforms fell over 70%, especially driven by all the work done and the journey we've undertaken.

Moving to client centricity. I'll share some figures we usually don't disclose, but I think it's a good moment for accountability since we are wrapping up 2022 and beginning 2023. Client centricity, as measured by Net Promoter Score, is very important for our day to day activities. The bank's global NPS has increased 20 percentage points since 2018. We significantly cut back the gap we used to have compared to our peers that were operating with higher NPS levels. That was our goal and we are succeeding in delivering.

We can see that most of our business is at record high levels, which evidences the engagement, the focus, the client centricity, and the digitalization actually happening. Almost 60% of our business reached what we call an excellence zone, with NPS over 70 points, such as the personality test segment, top business and business, which are two retail corporate segments. Itaú BBA Uniclass segment, private segment, credit card business, vehicle financing business. Rather than showcasing the evolution of this business and of the products portfolio, it's better to set the goal of closing 2023 in the excellence zone. That is, reaching an NPS over 70 points. This is our goal for 2023 on a global scale.

All our weighted business must reach an NPS of around 70 points by the end of the year. This is the goal and we really believe we'll be able to get there based on everything we discussed today. Let's strive to go after it and reach all these ratios. This is the great evolution for the client agenda.

Moving forward to 2023, I'll start with the expectations for the macro scenario. The main highlights are GDP is expected to grow by 0.9%, but I believe we have a positive bias. This forecast will likely be reviewed in the short term with an upward trend.

Regarding the Selic rate, the best expectation today is a fall towards 12.5% by the end of 2023. It naturally depends on decisions about the fiscal framework and inflation itself, which will have to be closely monitored. Inflation will be well in line with the rate of 5.8% in 2022. We expect employment rates to slightly rise to 8.5% from 8.2%. Foreign exchange will post a slight devaluation of the Brazilian real to BRL 5.5 to $1.

So moving to 2023 guidance, we expect the credit portfolio will increase between 6% and 9%, a more modest growth compared to what we've delivered in previous years. This is fully associated with the challenging scenario we are experiencing. That's why we choose to be more cautious in granting credit, a strategy we've been applying in the last quarters.

The financial margin with clients is expected to grow between 13.5% and 16.5%. Margin with the market is expected to range between BRL 2 billion and BRL 4 billion. We believe we'll manage to deliver positive margins for another year despite the challenging scenario. With the capital hedge cost already included in these figures, there is a significant impact of approximately BRL 2 billion depending on the interest rate differential.

Cost of credit is expected to range between BRL 36.5 billion and BRL 40.5 billion. Commissions, fees and revenues from insurance operations are expected to increase between 7.5% and 10.5%. Non-interest expenses are expected to rise between 5% and 9%. It's crucial to say that we expect the core cost not to rise over 2%.

We must remember that inflation measured by IPCA has been around 5.8%. And I always say that inflation for banks is usually higher due to the collective bargaining that brings in the inflation inertia from previous years. So we've set the goal of not letting the core costs rise over 2%. The whole difference between 5% and 9% lies in the investments in the bank's digital transformation, in modernization, in business and client centricity and in customer experience.

And last, but not least, the effective tax rate is expected to range between 28.5% to 31.5%. That's all I wanted to share on 2022 earnings and 2023 guidance. I'll be joining Renato for the Q&A session to address your questions. Thank you very much for joining us, and I'll see you in a while. Take care.

[Renato Lulia]

Well, hello, everyone. I'm back. Milton is already here with me. So let's start with the Q&A session. [Operator Instructions]. Now, let's start. The first question is from Domingos Falavina from J.P. Morgan.

[Domingos Falavina, J.P. Morgan]

I have two questions. Very quick two questions. In terms of provisions, the first is to understand a bit how that additional provision works. The additional one. Well, it seems the balance is BRL 17 billion. I wanted to understand how much is already destined for the segment for credit cards or specific sector of the economy and how much of that is completely free, let's just say, with the use – looking at the subsequent fines of approximately BRL 2 billion, BRL 1.3 billion, the exposure [indiscernible]. So, I wanted to know how much leeway do you have, let's just say?

And the second one, how do you reconcile the guidance for the growth, the 20% growth year-on-year with a portfolio that is growing also in 6% to 9%. So it's growing two times the portfolio when the bank is working with a derisk, you're increasing the risk. And this is a provision that is anticipated with the expected loss. And so, how do you reconcile if it's an increase of risk? Or are you going to be more conservative in the guidance? These are the two points.

[Milton Maluhy Filho, Chief Executive Officer]

Let me start with the complementary provisions. The complementary provisions, in fact, we've been looking at these balance for a long time. We do the periodic reviews. I would say monthly reviews on the volume of provisions that we have in the balance sheets, always looking at our portfolio with expected losses. And the bank has the practice of many years of being very careful, very prudent with the level of provisioning that we carry over the balance. So we have the reinforcement of provisions all throughout the previous quarter, specifically during COVID-19. You remember 2020. And those provisions, they're allocated for specific cases where we have some concern that we understand that the level of provisioning has to be higher.

Now, we always see the expected loss. We have the effect of the expected loss, which is within the complementary provisions part, is the specific case, it can be a segment, it can be a company, specific business or an adjustment that the bank deems necessary.

So, what do we do? Once a month at least, we do a complete review of these provisions. And when you take a look at case by case, what are the expectations for the recovery in the future, if it's improving, if it's not improving. So when we did the 100% provisioning in the specific case, which is a subsequent event, we looked at the balance sheet and we wanted to understand well. Is there any leeway in terms of some change in regards to the complementary provisions case. We decided to do 100% provisioning. That was the decision. We look first if there is an adjustment that has to be done within the complementary provisions. And in the end, we did BRL 1.3 billion going through profits and losses and constituting even more complementary provisions. So, in this specific case, we took a 2H and then, automatically, we did that review.

We don't give disclosures for specific cases. But since it was spread in the news and there is the Chapter 11 and our credit is registered there, our exposure total is BRL 2.8 billion for this specific case. So just to facilitate the math, it was BRL 1.3 billion with [indiscernible] and then BRL 1.5 billion [indiscernible] because it's not just the risk of their credit for the operation, we also have an exposure of derivatives, there is a loan and then that complements the total exposure. So, I'm giving you the results. We don't do the specific results. But this is a specific cases. But this is a very publicized case. So it's a lower exposure, BRL 1.5 billion and a complementary BRL 1.3 billion allocated.

So when we reviewed, we saw that there was an opportunity for a specific allocation. And in our financial results, if you look at several places, we leave it explicit that it's for a specific case that it's on the news.

And when there is a deterioration of the case and we understand that this is – given the case, given the unpredictability that there will be naturally more expenses of [indiscernible] in the specific case and then an immediate use of the provision that has been allocated. So I would just like to reinforce there is no negative effect looking up ahead. 100% captured in the fourth quarter. And looking up ahead, we are going to do movements as we receive more information.

Now your second point, which is the guidance. Here, there are two important elements that I would like to address. First, we look at the retail on the individuals portfolio. We see a stabilization of the delays. And this is the best expectation so far. We are growing 0.2 over 90 over the last quarter, so it's stable for the first quarter.

The portfolio is growing. It's about a growth of 9%, close to 10%. And the individuals, we didn't subdivide it by segment, but our expectation is that the individuals and companies, they're moving along in the same speed. If we extrapolate the fourth quarter of the year, in retail, for next year, given that we work with the expected losses, so we're always anticipating the new cycle production. This provision naturally will grow 13%, 14% with a portfolio that can grow close to 9% to 10%. So this is not relevant when we look at these numbers.

So it's important that we look at a number. That is very important. When we normalize, specifically the retail portfolio for two years, so this is the term that I've been using, we realize that there is a normalization, gradual normalization in this retail, and more challenges given the level of interest rates that we see and economy that we have, more – the leverage of the companies has to be lower since we have a fixed interest rate. And that made us be very careful in estimating the cost of credit that is much higher for 2023.

Specifically, in the wholesale that works with a lower – well, the delay is not – I don't like to follow the NPL 90 for the medium and large sized companies, but there you can see that the delay is insignificant, irrelevant, whether there is more relation with the cost of credit capture that we can observe all throughout 2023, given the scenario and also given the perspective, given the size of the portfolio to actually do more provision – an expectation of doing more provisions for 2023.

[Renato Lulia]

Now we have another person, Thiago Batista from UBS.

[Thiago Batista, UBS]

Congratulations on the results. I think that it was very good. Now, I have a question. I have a question, Tier 1 question. The bank went back to 13.5. So there is an ROI of 20%. And then you're working with the numbers aligned with [indiscernible] growth of the portfolio. The bank can pay clearly more dividend payout, in my math 60 and still keep the Tier 1 stable at 13.5. So, that's my question. Are we going back to that scenario that the bank is going to pay all the capital above 13.5?

And a quick follow-up on Domingos' question. What changed in the bank in regards to the specific case of Americanas in the legal proceedings? How has the bank evolved with this case of Americanas?

[Milton Maluhy Filho, Chief Executive Officer]

Well, let me talk about the capital here. We are going to systematically and consistently grow the level of capital. If you remember that, we started in 2020, with the provisions for COVID and then we start to recover. We implemented the hedge of the capital index policy and the bank is consistently generating value and financing its activities and having an increase of the capitalization of the bank measured by CET1.

Now, my expectation, looking up ahead, there was no scenario of the increase of percentage payment. We have 27%. We maximize the JCB, that's why the payout is above the minimum. We still provision looking up ahead for the level of the payout that is much similar. Yes, we're growing the results of the bank and then we're increasing the dividends, the JCB per share. That's our work.

Now, even though we recovered capital, which was a great news, we see challenges up ahead. These are typically two. First, there is new [indiscernible] for the credit risk. And in our first reading, they can be positive for the capital. But there is a public consultation, which is the operational capital, there is a measure in the way that we allocate it for now. But there is a review being done. And this measure might impact the level of capital of the bank. It's very early. There is a public consultation. There are several debates happening with the regulator. We're looking at Basel, several countries delaying the implementation. Our best expectation today, the provision is that, in January 2024, maybe there is a chance that we are going to, in fact, follow up in different geographies, a delay to 2025. So the bank is doing a provision for their capital looking up ahead. We are not going to fall in the scenario that we're going to pay for a larger dividend, knowing the prospectively we can have a use because of this event. It's not materially going to place us below the appetite. We'll continue to work, so that doesn't happen. We continue to replenish, but there might be, yes, an impact. There might be an impact. And we're going to follow up over the next quarters. There is no change in the policy of payout, therefore. We continue to follow the policy of dividends that was published and the capital. Our trend is to continue to grow. And we need on the regulators from the central bank that we do not know all the details on how it's going to be post the public consultation.

So, the corporate subsequent event, that specific case, about that, of course, yes. Every credit event gives us learnings, whether if it comes from a fraud or if it comes from a worsening of a scenario where we eventually did not predict or did not imagine that would happen. So I would say that that's part. It's an expensive learning without a shadow of a doubt, but we always have a learning however expensive it is. So, we want to do a complete review of the processes. We are going to go over the storyline, understand what we could have done, when, where.

Here's an important message. In this period, in the second quarter, well, this is a public case where you don't talk about the specific case. But since it's a public case, we reduced BRL 1 billion for this exposure in this specific case.

So there was a discomfort with a series of information. Of course, it's difficult to imagine that there was a fraud happening in a company with all the characteristics that you know of the company, but we were reducing our exposure, and we reduced BRL 1 billion in the period. Just so you know, the magnitude of the effort, given the operations that were due, we didn't produce new operations for several reasons. So, this is a learning.

So in our opinion of everything that we've seen, this is an isolated case. It's a fraud. We reviewed the portfolio. We reviewed several companies that are using the risk not only in the bank and in the market, we didn't identify any bad things. This is an isolated thing. It's isolated case, and we are learning and this is everything that we are doing whenever we incur into an event such as this.

[Renato Lulia]

And third, now, Gustavo is here. Hi, Gustavo.

[Gustavo Schroden, Bradesco BBI]

Congratulations on the results, specifically given the whole scenario. I wanted to change the subject. I want to talk about the guidance, the fee. Well, at least our understanding is that if we understand the run rating at the end of the year, there is maybe a little bit lower than the bank was presenting throughout the year and that there is a guidance of 7% to 9%. Specifically, if we look at – what do we expect for the mix for 2023? Well, an acceleration of TPV. Maybe there is going to be an impact in the credit card – well, there is an asset management pressure, given the challenges in investment banking. So, I wanted to understand. How do we see this end of the year that is more challenging in this line, the growth is weaker, and you are bringing an expectation much higher than the run rate at the end of the year? So, it would be the insurance compensating for all that. If you can go over the composure, how that guidance is built? Well, in my opinion, it's aggressive given the end of the year.

[Milton Maluhy Filho, Chief Executive Officer]

Okay, let's take a look. And we always challenge ourselves. Whenever we get into a new year, and I'd like to say that we got into 2023 better than we finished 2022 and better than what we started in 2022.

Having said that, looking up ahead, there is always a degree of challenge. And any guidance, many times, you have an objective, you have the best estimation. Not everything has an absolute, well designed and defined action plan. And this is part of our dynamic. We need challenges. This is how we like to deal with performance. This is how we like to deal with the indicators looking up ahead in the future. Now, along those lines, it's no different. We have a challenge. That's it.

Now, having said that, we believe that, with the information that we have, nowadays, it is possible to capture that growth all throughout 2023, if nothing else is altered. We can see that in different ways. Not only B2B credit cards, there is also the inter exchange. And when we talk about the credit card, we have to look at the fees, which is very important for the reduction, annual fees. Also, the programs for generating loyalty with our clients under the inter-exchange rate. So these effects are contained here.

The acquirings, as you've seen, if you look at the end of the year, when you'll have the buyers, typically, there's a growth. Here it's a better mix – we're searching for a focus in the repricing because of the penetration of financial products, interest rates, a management that is much closer to the bank, that integration has worked much more. And the buyer, acquirer, we don't like to look at them as a P&L of a business, but we like to look at them in a global context for the relation of the bank and the client. That's it.

Every year, we have the challenge because regardless of where the market goes, an important part of the result is coming from performance fees. And we have to be capable, we have a very competent team. We have to be capable – we have the multi tables besides the traditional tables of assets for exchange and we have the performance fee challenge and we've managed to deliver this all throughout the year. So we have a challenge for 2023. Obviously, with a risk of the market – with the treasury – it depends on the positions. How do we manage the assets and the risks all throughout the year, but there's always an expectation for the generation of alpha.

Now, whether it's a challenge, more uncertainty – well, the performance fee will always bring volatility. But wherever I think that there is a challenge is in the economic – the investment bank. There is a two sides of the same coin. Here, the broker, we can invest more in the individual portfolio, and then we can take products and solutions for our clients that had generated a lot of value. So we had a gap in the portfolio and we're bridging that gap monthly, consistently, and we see a growth. So, part of the result comes from the individuals when we have a portfolio that is much more robust, to service our clients better.

On the other hand, the investment bank, traditional, the activities of M&A have to continue. Equity capital markets, it will depend on the window of the market, how the global and local uncertainty scenario, interest rates, so there might be a good opportunity. And we imagine that even though we had important challenges, we will have an activity that will continue with a lot of dynamics all throughout the year.

And insurance, I always say – we see an evolution of the operation. This is a retail insurance, and we pile them up. So as we penetrate more, we grow, your pile the seasons for the subsequent years, and we expect an evolution at the bottom line 2023. So, insurance should bring good contributions in 2023. So we expect that this is – we have the execution risk, of course. Whenever we have investment bank, I always see more risk. But we're going to work hard, so we can follow up on the guidance that was placed.

If there's any change all throughout the quarters, any change in the scenario, or if there is any difficulty, then we're going to update the guidance if it's necessary. But once again, we believe that it's factual and we're going to continue running after the numbers.

[Renato Lulia]

We have Daniel Vaz, Credit Suisse.

[Daniel Vaz, Credit Suisse]

I wanted to talk about how the guidance of the growth of the portfolio, how it's made, do we have retail growing more? Well, wholesale growing below. If you are comfortable with individuals mix that is 48 and then a group with a collateralized credit. So if you can tell us more about the growth of portfolio and the breakdown.

The second question that is quicker, is there any changes in the spread that your practice in the wholesale, given the subsequent? Do you think that you're going to do anything for the supply chains involved? That would be my question.

[Milton Maluhy Filho, Chief Executive Officer]

About the growth of the portfolio, Daniel, we open up in the consolidated, the information, for you, but it's important to separate three main messages. Well, the portfolio is going to grow less than the 21, 22 [ph]. So there is a deacceleration of the growth., even though I think that that balance between insured and non-insured might be – there might be a growth in not-insured more than 23 [ph] than what we observed in vehicles and real estate, which has a great growth. So we're going to continue with a level of insured above 50, but there might be an adjustment in the mix, which is a positive factor for the financial margins as well. So, possibly portfolios with more risk. In the adequate populations with the adequate risk profile, we have a portfolio that is very affluent, and we've managed to gain share in the best risks, which is a good sign, but with a mix that is more favorable for more. So, we have a deacceleration in the vehicles, we see deacceleration because of everything that we've seen in the credit card portfolio. We are possibly going to grow in the core. And those segments that we've had a lot of safety, specifically in new clients with the close relationship with the banks where we have more growth.

And real estate, the increase because of the interest rate, our expectation that there is a going to be a deacceleration – deceleration all throughout the year. So this is the – how we see the retail.

Well, small and medium companies, SMEs are growing, but two digits low. This is something that we can foresee. And big companies. We also expect a growth that is low two digits, double digits, single digit high maybe, this is how we're going to see the portfolio of the companies that depends on the market dynamics. So, if you look at our numbers for 2022, you're going to see that our capacity to recycle the portfolio is very relevant. And we are the leaders of the capital markets where the market share – we are the leaders with 30%. So we're going to continue to recycle the portfolio, opening the space, and we're going to continue to operate and generating – cross selling our clients.

And the portfolio that will impact for negatively in 2023 not because it doesn't grow, but because the – we have the Latin America portfolio that we see flat all throughout the years, adjusted for real because of the exchange rate. So it's because of the currency. This is an overview of the credit portfolio, and this is how we are observing in 2023.

In this specific case, the review of the spread, very important. Reviewing the spread, it will always happen whenever we understand the scenario or the perspective, change the risk scenario, change the implicit risk of the company is worsened. So the pricing is something dynamic that we do every single day. There was no repricing because of the specific case in the media.

I say, once again, this is a specific fraud case, something that we do not see every so often. It's maybe the biggest fraud of all times. So this is an isolated case of everything that we observed. We don't see any contagion in our portfolio. We looked at all the chain, we always have to be careful. No materiality. This is a company that continues to work. They have challenges. We hope that the company will leave this process in the best way possible. There's people dedicated to that, but there is no repricing of the portfolio due to this event. We continue to price in the same way. We're always taking care of the scenario, but nothing that comes from the specific case. This is very important that we frame this.

[Renato Lulia]

…comes from Mario Pierry from Bank of America.

[Mario Pierry, Bank of America Merrill Lynch]

Congratulations on the result. Milton, I wanted to focus more in the retail. So, the weight of Americana with wholesale. And we have the companies that are subcontracting the financial advisors to restructure their debt. So, clearly, there is a worsening of the scenario in general. So, we need to understand from you if there is any specific thing that will worry you the most. Also, I wanted to understand when we see the guidance for provisions, how much is from wholesales, how much is from retail. So looking at the previous year, we had a high profitability in the wholesale. So, I think that your ROE is close to 30%. So I wanted to understand what is the capacity of the bank and profitability having a high profitability in the sector? Looking at the records, the profitability might be lower. So, wanted to understand better how are the dynamics and how you see specifically case by case?

[Milton Maluhy Filho, Chief Executive Officer]

In fact, specifically talking about the cost of credit and the evolution for the year and the sector, the segment of wholesale, wholesale for the bank, it's very broad. In the MD&A version and the way that we talk about this, it's very important that we understand there's several businesses here, not only the business of Itaú BBA, which are the big corporations in the middle, there is the whole business of asset management, which is in there. The operation of LatAm is also there, in there. So it's a business that is very complete from the standpoint. So, it's an overview that is a previous one with a wholesale, the retail vision. Well, no. In there, there are several businesses. Some more recently, and some more depending upon credits, some are outside of Brazil, which is the operation of LatAm which had a great evolution in 2022, with perspectives and challenges for 2023. Of course.

Now looking at the environment, of course, in a scenario that you're looking at prospectively, a GDP that is relatively low, much below the potential for growth, we're talking about GDP of 1% growth. We are talking about 0.9%. In the premise, I was talking with a bias of high – might be higher, but it's not going to be substantially better. So we are reviewing this scenario and we are going to publish the next phase. First point.

Second point, interest rate. Come on, interest rate, 13.75% plus the spread that is charged. It has an important pressure on any company, whether it's a small company or a large corporation. Even though they're very capable of accessing the capital markets, the base rate is much higher. That generates a pressure in the financial experiences. And it makes the company to really take care of their leverage level. The activity in the month of January is much better than what we expected, we've seen, but November/December were weaker months. So maybe there is going to be compensation.

Now with interest rates, 13.75%, there is a natural deacceleration of the company. But globally, the scenario improves from what we had two months, one month ago. We see global dropping the – dropping less than what we expected. And this is the whole framework.

In our opinion, yes, this is a scenario that is more challenging for the company, specifically from thresholds that were very low. If you looked at the cost of credit, close to zero, in some cases, because there was still a portfolio in the past. There were reversals that happened and companies performed better in several cases from what we expected, et cetera. So, we're going to see an effect of normalization also that it's going to happen in the wholesale.

You mentioned a few cases, restructurings. Come on, these are not new, to be very frank. These were open. Once again, the fraud, the specific case, it's not something that the traditional models would capture. The cases that we've heard, they're not new, they were already on the radar, they were monitored and followed up. So there is a re-RJ happening. So you generate 45 days and you come back, the Chapter 11 because of the legal protection, the strategy, and the whole thing. And following up on the process and the case is absolutely duly provisioned. We didn't have any concerns specifically regarding for those that follow up close.

So to answer. it's a challenging scenario. Yes. I believe that there will be a normalization. Yes. The interest rate currently, it pressures the bad debt in the segment of the companies. And then, we have to follow up these liabilities up close. So there is no specific sector.

What worries us is the leverage companies with high leverage with the cost of debt and they don't have an adequate capital structure. But, remember, then there are many ways they can work with that. There is a capital markets today that there's always an opportunity for opening a window and you can work on the capital of those companies. The shareholders themselves, they can inject the capital whenever there is difficulty. So there's X amount of situations that you can go over the problem.

Well, yes, we're expecting a worse scenario in 2023 than 2022. Point, that's within the guidance of the cost of credit. We don't open to break down. Substantially, the effect is retail in terms of materiality of provisions, but relatively speaking percentage, the biggest growth is wholesale. So we have to look at percentage, the cost of credit year-on-year if you removed the effect.

For the specific case of December, we have the retail for now from the nominal, the big volumes. And of course, the margin levels are – is very different. Well, it's from retail, and before it was wholesale.

[Renato Lulia]

Next question from Renato Maloney [ph].

[Unidentified Participant]

Congratulations on the results. I want to talk a bit about growth. When we look at the central bank data, specifically for individuals, measures that you and other banks took make sense. But greater reduction than we would normally see seasonally speaking. So I'd like to understand this deceleration and how this can affect guidance risk this year.

[Milton Maluhy Filho, Chief Executive Officer]

Yes, we've seen this portfolio decelerating for the last few quarters, actually. We made adjustments in the third quarter of 2021, and so we're talking about 13, 14 months of consistent, consecutive readjustments. We make adjustments, we see how things are going, make more adjustments. So we're very active in this regard.

So this deceleration has happened for a number of reasons, in specific portfolios. Real estate, for example. Interest rates. There's a lower demand. Vehicles, we proactively decided to reduce our exposure. For individuals, I think it's important that we understand where the income is lower in the portfolios. So this is a 10 percentage point in the mix – sorry, this is 10 percentage points, not 10%. So this is a six point NPL, give or take. We're looking at 150, 160 NPL above what we are disclosing. So, this has been proactive. And something we've been doing each month.

Yes, fourth quarter there was a deceleration. There is seasonality. Non-financed credit cards is growing. Otherwise, it's falling. And in personal loans, individual loans, two areas were affected. General loans, average balance still is fine. Overdraft and 13th salary are affecting the more expensive lines – recovery in the more expensive lines.

Yes, since there's piling up with retail, and we see this over the quarters, when we start to look at the future, we don't see much growth. So, the system across the board has done this to some degree or other. And where we see greater preoccupation, greater risk, we've made the adjustments that are necessary in the portfolios. This includes credit cards, vehicles, and the like. So we've been very prudent. I think we need to be cautious. That's what the outlook calls for us. I think few people look at this with such caution, as much caution as we are. So that's what we're doing. We're looking at a decrease in growth, and managing the portfolios as best as possible. Again, watching how these portfolios are performing over time, and make adjustments to the right, to the left. Again, that's part of what we do. And that's what we do on a day to day basis.

[Renato Lulia]

Next, Eduardo Rosman from BTG Pactual.

[Eduardo Rosman, BTG Pactual]

I've been following you guys for 15 years. I remember how you started compared to your competition way back then and how you are now. A lot of your peers say this performance gap is cyclical. Customer exposure, et cetera. We think it's more structural. Milton, since day one as CEO, you've been focusing on digital transformation, you've been pushing it. And you can see that this has really affected performance positively. Do you think there's still chance for growth here? Can we believe that this difference, better performance for Itaú is structurally better, is based on digital technology because it's better – it's even better now than it was 10, 15 years ago.

[Milton Maluhy Filho, Chief Executive Officer]

Okay, disclaimer. My disclaimer. Okay, I'm going to start with that. Okay, our numbers, our indicators, our bank, et cetera, these have been important. Second disclaimer, I'm not really going to go into performance, relative performance vis-à-vis others. You have the numbers, you know what's happening, you know how to assess this, in fact, better than I do. And I respect our competition. I highly respect our competition regardless of where we are at different moments in time. It's a marathon. And it's an ongoing marathon. There's no end. It's not something that ends next quarter. It's ongoing, ongoing, we're going to run, we're running, we're running, we'll never reach the finish line.

Now going back to performance. Our digital transformation has been very critical for the bank, no doubt about it. The speed of change that we have implemented and the features has been phenomenal, how quickly we've changed our systems, how fast we've simplified things, how we've made them interoperable, the cost of serving our customers and the quality of the new solutions, all of this together has been incredible and translates to a wonderful NPS. It's not just digital transformation. It's cultural transformation, this customer focus, obsessed with the customer, all of this has resulted in customer satisfaction. So it's a number of factors that have led to these positive numbers and these positive results. And yield and NPS go hand in hand. You can't have high sustainability, you can't have a product that's not sustainable and then get an NPS. We work with sustainable products, sustainable solutions that maximize yield and maximize satisfaction of our customers. So they work hand in hand together. So I have no doubt that digital transformation has been absolutely critical in the evolution of the bank and how we work and how we work with our customers. There are lots of communities in our bank. If you don't have the digitalized platforms and all the components in place, you're not going to get the speed you need. So you're going to have people. You have agile people, but they don't have the agile tools, you're not going to be able to deliver on your promises. So the NPS reflects that we have about 20,000 people in our community, over 2,000 squads, that just shows how relevant the agile system is in our company.

So why has our performance led to these wonderful results? Very positive, very high. It's because we're a full bank. I insist on this from the beginning, full bank is not just being present in the different sectors and areas. That's not what it means. It means managing these and understanding where you're operating. And because of our dedication and because of our investment and our focus over many years, we've been relevant in a number of businesses. We've been able to perform in a number of areas. We were talking about wholesale. Itaú BBA, very important in these results. It's not just commercial. It's investment bank, it's products, it's cross sell. If you look at our positions relative – our relative positions in all of these businesses, we are high up in all of the rankings, the returns are fantastic. 2022, you saw these great returns. So if you add this all up, all of this helps our performance. When we look at retail, traditional retail bank, where we work closer with customers, we've had excellent performance, we're close to the customers, we work with them, we've been able to increase in customer engagement with the bank, each engagement percentage point represents a billion reals. Obviously, there are challenges in cyclical moments. We've got vehicle issues in each area in the vehicle sector. But if you understand the risk and you can anticipate these cycles and if you have a portfolio that balances out these difficult moments, it means that your yields are going to be quite high, your earnings are going to be quite high.

We have credit cards in Brazil, and we look at our markets and we look at our portfolio. Yes, we're facing a more challenging moment. But we have a number of other businesses that are maximizing their revenue pools. And their leadership is unquestioned. So, this healthy portfolio has helped us in terms of yield and revenue across the board.

Challenges are going to – are always going to – we're always going to face them, we have difficulty with retail, obviously. There may be decreases in terms of yield, in terms of earnings, because of the cost of credit. But because we can manage a number of different businesses, and that's implicit in our guidance, we're able to confront the challenges and deliver excellent numbers.

Yes, we've got competition across the board. We've got transformations, changes happening, and we continue understanding that, pursuing it. So I don't see anything today that will make me change my outlook in terms of yield. Obviously, things may change over time. Obviously, the macro is important, zip codes are important, is important in our results. And this obviously affects us directly.

So, again, it's going to depend on general macro outlook, so that we can continue to deliver on these numbers. And when we look at global market, and this is also quite important, not just customer wise, but generally, we look at the market risks to serve our customers. We don't look at as simple returns on associated risks. And separately, we've been able to manage risk excellent – they've done an excellent job managing risk in a very challenging situation. And you can see that the results to returns are excellent. Hedging costs are great. BRL 2 million in margin just last year. If it weren't for that policy, we'd even have higher returns on the top line.

[Renato Lulia]

We have with us Tito Labarta from Goldman Sachs.

[Tito Labarta, Goldman Sachs]

My question, a little bit more macro, but also kind of how it will impact the bank, right? The rhetoric we're hearing from the government seems to be increasingly negative, questioning central bank independence, high interest rates, renegotiation programs using public sector banks to support growth? I don't know if you've had any conversations with them at all. Just how do you think this environment could potentially impact the bank and the way you run the bank, particularly if some of the public sector banks start to lend below market rates? Just any color, your thoughts on the current macro and political environment and how that could impact the bank?

[Milton Maluhy Filho, Chief Executive Officer]

Let me first of all say that, yes, we've been having conversations with the government, with Fernando Haddad and his team. Not only with him. Last week [indiscernible], we had four ministers, they're telling us a little bit more about their plans. Simoni, Esther, [ph], Fernando Haddad, and also [indiscernible] of BNDES. So, our view is that all the discussions we had so far are very positive. Okay? So I think the direction and the concepts are very clear. They've been very open to listen to us and understand our views on this scenario. The noises that we've been hearing recently – in our democracy, the way we've been very polarized, I would say, for the past year or so, it's natural to have some noise as we are seeing right now.

The thing is that we have to wait. We don't have all the information. We have the first effort coming from Minister Haddad to reduce the deficit. So this was a positive message to the market, that the deficit is very important for the government and they will pursue to reduce the deficit for 2023 and so.

We have a huge discussions about the goals and the inflation target. I think it's an unnecessary noise. So my view is that they have to define as soon as possible the new inflation target and work on that because, otherwise, there is an impact on the prospective inflation, the expectations are going up. So only because of the noise. And this has, of course, an impact in the interest rate curve. And the most relevant information, from my view, and I think the whole market is expecting, is the new fiscal framework that we should understand a little bit more by the end of April. This is what Minister Haddad has been telling the market.

So I would say yes, there is noise. Yes, we've been hearing the discussions. But we have to understand that we are in a democracy, it's part of the process to have some noise. The most relevant things is that whenever we have new decisions coming from the government and new efforts coming from the financial team, we will have more information to forecast looking forward. But there is a lot of uncertainty. And this uncertainty, yes, it changes the way we manage the bank. So we have been more conservative, yes. We have a prudential approach, yes. We don't have all the information. So it's difficult to forecast. As much noise you have, as less confident we believe we have to be in running our businesses.

So, there is a guidance, there is these inputs that we consider on the macroeconomic scenario, the GDP, we may have something around 1.3, 1.4 for 2023. This is something that may have a positive impact. But again, there is a lot of challenges and a lot of noise. And this, of course, makes price not only in the financial market, in the system, but in our decisions. So we expect that this noise starts to reduce at some point, especially if we take out the most relevant decisions that should be taken to take this noise of the yield curve. So this is our best expectations.

And we have to wait and see what will be the message and decisions that will arise in the coming months. But, yes, we are more conservative and more cautious with the current scenario.

[Renato Lulia]

From Santander, Arnon Shirazi.

[Arnon Shirazi, Santander]

First, I wanted to thank you for the 2022 results. Excellent. I wanted to know about bank's investments specifically. What do you expect for 2023? What is the outlook? Were you expecting to invest more heavily? And once again, congratulations on the wonderful results.

[Milton Maluhy Filho, Chief Executive Officer]

We're quite satisfied with how our business has been developing, specifically investments. We did our homework, we made the right decisions. We made the right investments. So when we look at maturity, this is three months, six months, depending on the investment, depending on where we're located, where we're investing. We've got B2C, over 2,000 employees focusing on this, with great new platform, great tools.

If we look at the platform and all the different products, our products are excellent. It's a very open platform with tons of funds, including third party funds. We also have product solutions that are very specific, that are specific to different customers. This allows us to understand and work through the cycles. So if you want something that's really more focused on your own products, you want something that's more focused on lower risk, we've got that too. So we're able to address these risks. We've been able to balance them out based on what our customers want to offer. Supply and demand has been quite positive.

I'd like to stress, our business model today is to encourage our investors, is excellent, excellent. Our performance, our portfolio returns are fantastic. Regardless of the products and how it is for – the most important thing is that it best meets our customers' needs. And this is what we're really focused on. And we've seen excellent results because of that. And I really want to stress that. There has been a reduction of volume loss in the last periods, and that's excellent. Our portfolio is much better structured. Our NPS is much higher. Our consultants are focused – again, interest rates also help. And we've been able to gain market share in investments overall. So if you look at individuals, this is probably one of the best ratios we've seen, individuals with these investments. Are we completely satisfied? No. Have we reached our main objectives now? We have challenges ahead of us. We'd like to improve.

I'd actually like to talk about some of the products that really – we really advanced a lot – we had a lot of progress in 2022, but we need to make a lot more progress in 2020. There are some gaps that we need to address. And so, we're focusing on that.

So when we look back, we found the right model, we've made excellent progress, we established a really solid model. And so, now we're really seeing this. The pipeline for digital products has been excellent. So there's lots of investment in that. But there's still a lot to be done. So we're happy where we are. But we'll be more happy when we get to where we want to get to. But we're very happy with what we've gotten to so far.

[Renato Lulia]

The next one is from Rafael Frade from Citibank. Congratulations on the results. I want to talk about the financial margin. We've seen a stability and then there is a discussion on how that evolution would be. Can you comment a bit more on the mix of the retail? And then, we have spreads a bit below for 2023, but we see that in wholesale, at least the largest level in the historical records. So, I wanted to understand wholesale. We have the product spread. At the beginning, Milton said that there is not a relevant change in spread. So, what explains this margin of retail?

[Milton Maluhy Filho, Chief Executive Officer]

Well, once again, we see an expansion for 2023 that is very subtle. So, we continue to believe that there might be an expansion, but there's going to be in the margins – we've been running at a profitability level that is very good. I'm looking at the consolidated, okay? But we can expect that there's going to be an increase in the line all throughout the time. The guidance is explicit on the growth of the margin. There is a series of effects here. The first effect is that we should have the fourth quarter that has an atypical effect with the payment for the starting salary, the non-financed portfolios have been growing, the loans have been reduced, so that affects the mix of the line.

On the other hand, more volumes, we've managed to get some products with regulatory caps. So there is the increase in the funding structure or funding. We have the real estate credit, there is a dynamic of the price of the asset and the liability, the savings, the treasury against the credit. So, we also have the competition. And we see pressure in the spread in a few products, specifically those that have a regulatory cap.

Now, on the other hand, since we are a full bank and we have penetration for the – relationship with the clients that is very relevant, we have all the cross sale that also affects the margin, whether if it's several products or transactionality of treasury or cash management products and deposits, and the volume of capture throughout the bank, that generates a lot of returns. In part, also the interest rates that are higher, we also benefit. And I would say on the short term, specifically with better results, not only in our deposit structure saving, but also the working capital that has also benefited. The impact is not immediate. We do the hedging, whether if it's of deposits and capital, and several vertices looking up ahead, but we also see in 2023, given the interest rate levels, a potential positive effect that comes from the deposits in our working capital.

Now, in the wholesale, because we are a full bank – and once again, we can capture several treasury products and we have penetration of cash management that is relevant, we have the outstanding balances in the deposits that affects, importantly. But the wholesale is not just Itaú BBA. It's asset with a performance fee and the growth and results has also affected that when we look at the wholesale as a whole.

And there is the operations for LatAm that has had a better profitability for 2023. We've had substantial growth in all countries of LatAm and with a profitability level that is much better than what we had operated in the previous years. All of that adds to – the challenges, of course, are big. But the interest rates in the short term also has some positive impacts. And I like to say that structurally, we rather work with the interest rates that are lower, so that the bank can expand the business and increase the risk appetite, so that the companies can, in fact, have a quality of credit and capacity for growth that is much more healthy than in a scenario of risk of interest rates that are much higher for a long period of time.

So, when the interest rates go back to the lower – then we're going to lose some revenues on the short term. But on the other hand, we're going to recover the capacity for growth and growing much stronger. And part of the math is the cost of credit.

[Renato Lulia]

We have with us Carlos Gomez from HSBC.

[Carlos Gomez-Lopez, HSBC]

I would like to go back to the capital. First, could you quantify the impact of increased operational risk weighted assets whenever it is applied? As you mentioned, earlier could be January of 2024. It could be later.

Second, has your risk appetite changed? You mentioned a lot caution, uncertainty. Do you want to operate with a different level of capital? What will be your current capital level at which you are aspiring for your CET1?

And finally, related to that, could that affect your investment in XP? And is that something that you're going to keep? Or you might sell at some point also to reduce your risk?

[Milton Maluhy Filho, Chief Executive Officer]

First of all, talking about cap, as I was saying at the very beginning, we still believe we have room to increase our capital base. Just to get your second question, then I go back. Yes, we decided to run the bank with a CET1 – core common equity of 11.5%, which is a little bit below of the 12% that we had in the past.

Why is that? First of all, because, in the past, the most relevant negative impact that we could have in capital had to do with the FX rate. Okay? And for two reasons. First of all. the overhedge strategy that would generate a lot of tax credit and withholding tax and capital. And second, due to the operations, we have not only in LatAm, but dollar linked or other currencies linked portfolio, this brings a lot of volatility in our capital index.

So, having said that, when we took out the overhead due to change in the regulatory environment and also implementing the hedge for the capital index, we took out all this volatility. So that's why we reduce our appetite, so we don't need to run the bank with 12% of common equity, but 11.5%. That was the most relevant explanation for the decision.

But more than that, we are very concerned about our ratings. So, we don't go much below that. We could. Because we want to keep a very good standard of ratings, and are doing some local or international, more than that, benchmarks to understand what would be reasonable for us to keep in terms of capital. So, that's why – so we believe that the most relevant impact for volatility is out of the table now. So, the buffer is more relevant today than it was in the past even with this 50 basis point reduction.

Talking on the operational side, this is very early to say. We're not releasing a specific figure. But my view is that we may have something that could be around 100 basis points depending on how it is implemented. So, this is reasonable to expect. So as we see an increase in our capital for 2023, more profitability, the risk-weighted assets growing much less than what we used to be in 2022 and other major/minor impact, we still believe that we will be generating capital for the year end of 2023.

Now depends if the operational risk will be implemented or not in 2024, but we are, of course, provisioning and planning the capital base of the banking, taking these in consideration. This number, it's very, very – 20,000 seat information, I would say. Just to give you a sense that, even with that, and with the capital plan that we have, we won't be below the level of risk appetite of the bank. So, we'll still be in a very well position in terms of capital base.

[Renato Lulia]

The next question comes from Gilberto García from Barclays.

[Gilberto García, Barclays Capital]

I had a quick follow-up on the complementary allowances. We thought that the they did increase quarter-over-quarter, but in a much lower magnitude than the exposure to the subsequent event. So is it fair to say that if it hadn't been that – if that hadn't happened, you could have released something like BRL 1.2 billion from these complimentary allowances?

And then a quick question on your guidance for expenses, you have a fairly wide range. Is it okay to understand that if – let's say, if conditions are challenging throughout the year, you could delay or hold off on some investments?

[Milton Maluhy Filho, Chief Executive Officer]

Talking about the provisions, yes, to be very precise here, if we didn't have this specific event, we could be in a position to consume part of those complementary provisions, those allowances that you just mentioned. So the answer is yes. But looking to the portfolio, looking name by name, we understood that the best thing to do was to provision 100% of the specific case the way we did at the end. So being very sharp, clear as we could.

And talking about 2023, we do believe that we have to keep an eye on the cost of credit, we have to keep an eye on the guidance range that we have, understand how these allowances and complementaries will pursue and how we should approach them.

And talking about investments, if I understood right your questions, you mean investments in generally speaking of the bank? We have of course – we discuss investment every single day. Okay? And we decide if we should or not expand some business or some credit, some business line or new business model. So, when we look to our expenditure and the cost of the bank for 2023, what we believe is that we have room to improve our efficiency ratio. And we're going to keep doing that. And also, on the other side, we want to keep investing for the franchise, for the future of the bank. So we don't like at all to run the next quarter, making decisions of avoiding investing in things that we really believe, but the cost of equity is different today, the scenario is different. So we're always more cautious when making a decision investment – investment decision due to the scenario, due to the cost of capital, but we take those in consideration.

But another relevant thing that I would like to highlight here in terms of costs, running the bank, we want that the core costs of the bank, and I said that before in the guidance, won't be above 2% year-on-year. With the inflation that is not the inflation of the year, but you have, of course, the impact of the inflation of the year before and also the banking industry inflation is higher than the IPCA, so we do believe that we can keep 2% on the core side. It's a very relevant adjustment that we do to open pace and room for more investments in the bank.

[Renato Lulia]

Now we're going to the last question from our analysts. And last, but not least, obviously, the question come from Juan Recalde from Scotiabank.

[Juan Recalde, Scotiabank]

My question is about the acquirings business. In 2022, the conditions in acquirers, they grew above the transactional value. So what is the expectation for 2023 for the growth of the transactional value? And can we see the revenues? Were the conditions in acquirers growing above the seasonal value for 2023?

[Milton Maluhy Filho, Chief Executive Officer]

Look, the acquirings business is more and more a product within the organization. We closed the capital of Redecard and we've been investing more and more to include this acquirer, buyer in the bank. And we can do it much more faster.

And we need to look at this with a grain of salt. I'm going to do a few brief comments. Yes, we have been growing revenue larger than TPV for several reasons. First, the repricing capacity that we've had. So separating those clients that need to be repriced, those clients then have a re relationship of acquiring not just a customer, but more product. We're seeking that penetration of the financial products has been very important. And that has brought very relevant results. So that's why we have a substantial growth.

We've been operating more and more with the adequate mixes. So we've tried to serve our clients, but always try to grow in the more profitable mixes. And this is the evolution in this work of the network and the bank has had relevant results. It's a product in a business that we add strength with the buyer for the distribution, to be able to grow in a very profitable segment.

The year, if you look isolated, the P&L of Redecard, and this is not a great reading, but remember that our business model, every capital of the business, we isolate [indiscernible] corporation.

When we look at the results of several other companies in the market, all the working capital is benefited with an interest rate that is higher. Or the cost of funding too, given that it's zero because it's capital – to do the anticipation operations with the effective lower rate, we price at the margin. So we look at the opportunity cost for funding to the pricing of the anticipation at the end. So this is from the managerial model. It's cleaner from these effects and we isolate the working capital and the corporation is not located [ph] at the business per se.

So I look at this way. The great business/. We've had a great evolution, NPS that has been advancing, all the advances in the relation with the clients and the proximity with a bank. I am very optimistic for 2023. For 2023, I think that there is a double effect, not only the performance indicators should improve, but also the isolated result of the business should be better because we've done to hedge of the liabilities. Many companies, they didn't work with that – so they didn't do the adequate hedge. So we implemented a hedge policy that has worked very well. And that has brought stability for the results. So I can expect a better result for the buyer, the acquirer results for 2023. It's not the level of results that we operated last year. Structurally, the industry has changed, the margins are thinner, but we've managed.

And another point that I would like to state. When we look at the base of clients that are active, there is a reduction. And the reason is because there is dirt [ph] in the base. There were some segments where we didn't – where we invested in the past and then we made the decision of leaving. And so, basically, credit card Bob [ph], which was a specific individual segment that, at that moment – the operation wasn't structured in a way that it should, you have a lot of bases of client in amount where you don't have a resulting profitability. So, VPL [ph] of those harvests are negative.

So the cleanup happened at the base over the last few years. And where we are focusing, we are growing the base and where we decided to leave because they're not profitable segments, we have more amount of clients and little profitability, maybe none. So, that's why you see the base of clients that are reduced, but this is healthy, their direction is good. So we're very satisfied with the evolution. And then we have a great 2023/2024 acquirer.

[Renato Lulia]

Now finishing the question we received, the WhatsApp questions. I know that we have a short term, but I wanted to ask you at least one, so we can finish. So the questions were from several themes. We've covered cost, NPL, portfolio. But there is one that I chose to finish our talk, which is about what we call beyond bank. So the question is from [indiscernible] and he asks, we have a portfolio that has evolved in the bank with products beyond the financial market. Thinking about the increase of that portfolio, what are the other businesses that the bank foresees as potential for next years?

[Milton Maluhy Filho, Chief Executive Officer]

Beyond Banking is part of our strategy, actually. And we've got to talk to our customers to find out where there are new opportunities. And that's what we've been doing. Itaú Shop is a great example. We're very happy with the progress thus far, it's been growing substantially. All of our iPhone forever, Samsung forever, Apples and all these products, all these partnerships have been wonderful. We've seen excellent results. The results have been great for the bank. And we've been able to offer exclusive products to our customers and solutions to our customers.

And we found other profit pools. And these are not the traditional profit pools of the financial system, of the banking system. So this has actually resulted in not just cross sell, but better conversations with our customers, better audience, better interaction with our with our audience and publics. We've got more interaction with our apps, with our super apps. It's been great. So it has been developing wonderfully. We've seen a lot of progress.

When we see cash management for wholesale, we've seen a lot of progress as well. This is also considered part of Beyond Banking. There are a number of initiatives. And our role is to be open to this, to be looking out to see where there are opportunities, where there are correlated opportunities, where there are ecosystems that we can tap into. With TOTVS, we saw a great – this is great. We're waiting for one last authorization. We've been able to distribute some of our solutions in other channels. Avenue, for example, we brought this in. These are ways to reach other markets that we weren't operating in. Specifically for affluent customers, those who have resources and funds and international resources, our offers before were limited to personality type. So, we really need to make this access more broad.

So we've been able to fill out these ecosystem with new offers, new products. And we've looked to Beyond Banking because we understand there's great synergy for the customer. And this generates value to the customer. I don't have to leave my app. There's associated loans, there's credit, there's the payment in installments, products, there's funding, there's loans, and so obviously this creates loyalty not just with the bank, but with the products that are behind these offers. So, we're really looking closely at these new business opportunities.

[Renato Lulia]

Okay. So, we're just going to end our question-and-answer period here. Before we close, I'd just like to remind you that all of the material from this earnings call and the recording, the results and all of this will be available on the bank's website. So please take a look when you get a chance.

Milton, thank you so much for your work today, for presentations today. Thank you for presenting.

[Milton Maluhy Filho, Chief Executive Officer]

It's wonderful to be here. I'm sure we'll be able to – we'll have many opportunities to see each other or meet up over the next quarter. I look forward to telling you how our first quarter is. The challenges are great, but we're up for it.

I'd like to end by saying we're quite satisfied. As I mentioned at the beginning, we're quite satisfied. We started 2023 much better than 2022. And certainly, better off than we ended the year last year, although it was a very long and difficult year. This month as well. We are very dedicated, very focused, we're very excited, very willing. But we're also conservative, we know what we need. We're aware of the challenges that we face, we're aware of what we need to do. And we are working hard to deliver on what we promised to deliver and to give you sustainable performance over the years. We know the challenges are great. We talked about some of them today. And I hope to give you some updates over the course of the year, over the course of the quarter.

See you soon and hope you're all doing well. Thank you very much. Until we meet again.